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Making Mutual Funds Part of Your RetirementThis year’s high-profile bankruptcies have shined a spotlight on one of the most basic rules of investing: diversification.1 Allocating a high percentage of your net worth to one company can pose an unacceptable level of risk — even if the company is your own.
One way to potentially reduce some of the risk to your retirement savings and accumulate assets outside your business is by investing in mutual funds.4 Mutual funds can offer the potential for growth with a high level of diversification compared to investing in individual securities. They pool investors’ money and construct a portfolio from individual investments. Most funds fall into one of five major categories. The appropriate choice for you will depend on your goals, risk tolerance, and time horizon. Income funds seek to provide a regular income, typically from bond interest or stock dividends. They are subject to the risks normally associated with interest rates, inflation, and stock market volatility. Balanced funds are sometimes referred to as “hybrid” or “total return” funds because they try to achieve current income and long-term capital growth. Managers of these funds seek the balance of stocks and bonds that yields maximum performance. Growth and income funds are similar to balanced funds but with key differences. In particular, they may own moderate-risk growth stocks rather than the more conservative instruments common in balanced funds. Growth funds place more emphasis on long-term capital appreciation.5 Management style can vary greatly from one fund to the next because of the variety of instruments available, ranging from common stock to convertible securities.
It’s common to want to put everything into your company. By investing in mutual funds appropriate for your situation, you may be able to avoid exposing your retirement savings to the same level of risk as your business. 1) Diversification does
not guarantee against loss; it is a method used to help manage investment risk. © 2002 Emerald Publications
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Sometimes
the most skillfully managed companies can be vulnerable. The Small Business
Administration found that outside business conditions were the most common cause
of bankruptcy.2 If you plan to rely on income
from your business after you retire, you could be subjecting your retirement to
the same level of risk as your business. Nearly one out of 10 employer firms
closed its doors in 2000.3
Aggressive
growth funds
typically offer the opportunity for greater returns than more conservative
investments but with higher risk.6 Fund
managers may dedicate a large percentage of assets to companies that are part of
a new trend or technology in pursuit of both long-term and short-term gains.
